ECONOMIC ANALYSIS:

Wealth over work, $28,684 to $1

Tax reform proposals make not even a gesture toward eliminating the biggest single contributor to income inequality in America: lower taxes on income from wealth than income from work.

On September 27, media reports outlined the tax plan hammered out in secret by the GOP’s so-called Big Six. The morning of the 28th, the writer Stephen King tweeted his scorn: “Same old same old. The fat man’s busy dancing while the poor man pays the band.”

The poor man doesn’t really pay the band, but there’s plenty of reason to second King’s emotion.

The proposals reaffirm the Republican obsession with shoving more money into the pockets of people whose pockets are already bulging. The haves, and only the haves, would reap billions by repealing the alternative minimum tax and the estate tax. More would go in the same direction by taxing the income of pass-through businesses at 25 percent.

Worst of all, the proposals make not even a gesture toward eliminating the biggest single contributor to income inequality in America: lower taxes on income from wealth than income from work. Income made sitting by the side of the pool (capital gains and dividends) gets taxed at a lower rate than income from wages. For taxpayers in the top bracket, the preferential rate amounts to a break of roughly 40 percent (23.8 percent on investment income vs. the top marginal rate of 39.6 percent on ordinary income). The tax break for the everyday well-off is even greater, 15 percent vs. 28 percent, a savings of over 46 percent.

Candidate Trump promised a big gesture, ending the carried interest loophole that lets hedge fund managers mislabel their income as capital gains. They’re “getting away with murder,” he said. They are, and the crime pays big-time.

It’s true of course that the rich hand over by far the biggest share of individual income taxes in America. It’s also true that an ever-greater portion of their income flows from wealth rather than work. That means a major tax break on ever-more billions: driving up the net incomes of the super-rich and the merely rich, driving up inequality, pushing effective tax rates on the upper reaches so low that Warren Buffett says his office workers pay taxes at a higher effective rate than he does.

It also means that work is taxed more than it should be, or that wealth is taxed too little, or both. Steven M. Rosenthal, a senior fellow at the Tax Policy Center, frames the issue starkly: “We’re taxing the rich much too lightly because we tax capital so much less than labor.”

Trump is a golden example of who strikes gold under the GOP plan. Bloomberg News denounced “The Trump Tax Reform’s Pass-Through Boondoggle,” calling it “a great deal for the Donald Trumps...of the world.” Leaked pages from the president’s old tax returns show that he paid an alternative minimum tax of $31 million in 2005—a tax he now wants to repeal. The Trump family, of course, would benefit “yugely” if the estate tax gets the ax.

Tax expert and author David Cay Johnston founded a news service to focus on “what the President and Congress DO, not what they SAY.” In an article on that website, Johnston showed what happens (and what presidents and Congresses knew would happen) when tax policy favors wealth over work. He used IRS data to compare “the very highest income Americans in 1961 and 2013 with the vast majority, the 90%.”

His calculations may surprise taxpayers of all incomes: in real terms, adjusting for inflation, effective rates have dropped sharply over those 52 years. The 90% paid an average 9.6 cents out of every dollar in 1961, but only 7.6 cents in 2013. The 400 richest paid 22.9 cents in 2013 compared to 42.4 cents in 1961.

“That’s a rate cut of 19.5 cents per dollar,” Johnston wrote, “that’s almost 10 times as large a tax-rate cut applied to a lot more dollars.” It lifted the 2013 tax savings for the super-rich to an average of $51.6 million.

The gusher came after-tax. Comparing 2013 to 1961, the income of the top 400 rose on average by $195.4 million. For the 90%, the average rise was $6,812. “Now here comes the...ratio that may take your breath away. For each dollar of increased after-tax income enjoyed by the vast majority in 2013, the top 400 enjoyed $28,684 more. That’s $28,684 to $1.” (The ratio was even greater with Social Security taxes factored in.)

Trump’s proposed tax cuts are now masquerading as GDP growth hormones. Modest cuts, if any, are being touted as a middle-class bonanza. The real bonanza will stream even more to wealth, not work.

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